Request for Equitable Adjustment (REA) and Contract Claim — Contingent Revenue
Accounting for a contractor's claim against the government for additional compensation — recognizing only the amount that is highly probable not to be significantly reversed, with the claim process taking years to resolve.
| Account Name | Type | Debit ($) | Credit ($) |
|---|---|---|---|
| Contract Asset — REA / Claim (Constrained Variable Consideration) | Asset (+) | 12,500,000.00 | - |
| Revenue — REA (Highly Probable Portion Only — Constrained) | Revenue (+) | - | 12,500,000.00 |
💡 Accountant's Note
Government contractors frequently incur costs beyond the original contract scope due to government-caused delays, differing site conditions, constructive changes, or superior knowledge. The contractor submits a Request for Equitable Adjustment (REA — a negotiated remedy) or a formal Claim under the Contract Disputes Act (adversarial — goes to the Armed Services Board of Contract Appeals or Court of Federal Claims). Revenue recognition: these amounts are VARIABLE CONSIDERATION — the outcome is uncertain. Under ASC 606-10-32-11: include in the transaction price only the amount that is 'highly probable' not to be significantly reversed. In practice: (1) REAs that are clearly meritorious and in negotiation → include the expected settlement amount (constrained conservatively), (2) Formal claims in litigation → typically not recognized until settlement or judgment, (3) The UNISTAR/accounting practice: often recognize only costs incurred (no profit) until the claim is settled. The Bruner and O'Connor treatise on construction contracts is the key reference alongside FAR/DFARS for the legal framework.
Practitioner & Systems Framework
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REA and claim accounting requires coordination between the contracts department (who maintains the legal position), program management (who quantifies the costs), legal counsel (who assesses the probability of recovery), and accounting. The claim must be 'certified' by the contractor's senior official when it exceeds $100,000 (FAR 33.207) — a certification that the claim is made in good faith, is accurate, and the supporting data is complete. False claims expose the contractor to the False Claims Act (treble damages).
⚠️ Audit Flags
REA and claim accounting is highly judgmental — auditors apply maximum skepticism to revenue recognized from unresolved claims. The variable consideration constraint requires 'highly probable' — a much higher threshold than 'probable' (ASC 450's contingency standard). Auditors assess: (1) Legal counsel's written assessment of claim probability and expected amount, (2) Settlement history for similar claims with this customer, (3) Whether costs associated with the claim are properly documented and allocable. Recognizing speculative claim revenue (recognizing profit on REAs not yet negotiated) has led to SEC enforcement actions against defense contractors.
📄 Required Documentation
REA submission documentation (certified cost detail, factual narrative, legal basis), contract disputes act claim filing (if formal claim), legal counsel's probability and amount assessment, historical REA/claim settlement data for this customer, variable consideration constraint analysis, negotiation correspondence, and ASBCA/COFC case status (if in litigation).
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